01/06/2004 - 22:00

The regulator

01/06/2004 - 22:00

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IT is fascinating to see our new economic regulator Lyndon Rowe stick up for former independent gas pipelines access regulator Ken Michael’s determination regarding pricing arrangements for the Dampier to Bunbury natural gas pipeline.

IT is fascinating to see our new economic regulator Lyndon Rowe stick up for former independent gas pipelines access regulator Ken Michael’s determination regarding pricing arrangements for the Dampier to Bunbury natural gas pipeline.

I guess we could all expect regulators to stand by each other, like encircled troopers, but the reality is that Mr Rowe could well have decided to be less supportive than he has clearly chosen to be.

But fully backing Dr Michael, whose portfolio has been subsumed into the new one taken over by Mr Rowe, does allow the former WA Chamber of Commerce and Industry chief to take a tough stance on similar issues in the future.

In his speech reportedly to the Australian Institute of Energy this week, Mr Rowe said Mr Michael had been unfairly criticised for his decision that resulted in the DBNGP being placed in the hands of the receivers.

“If the rates of return used by regulators were discouraging efficient investment that would be a major concern but the debate around this matter needs to be based on more than unsubstantiated assertions,” he reportedly told the conference.

“It is not the role of the regulator to turn good commercial decisions into bad ones.

“Equally, it is not the role of the regulator to turn bad decisions into good ones.

Neither result would be in the public interest.”

Mr Rowe says regulators introduce sovereign risk when they create uncertainty, not when they do their job properly.

The long and short of this view is that Epic Energy simply paid too much and then tried to bully the WA Government, and its regulator, into allowing it to charge enough to make money from the deal.

All good stuff I reckon.

I support Mr Rowe for being prepared to take a tough stand but I don’t envy him the task of determining whether someone, like a future Epic Energy, made a “reasonable commercial judgement” when it buys another big asset … like a power station for instance.

The best way to regulate, of course, is to have plenty of competition, so the market can weed out those who paid too much to enter the business.

When that is not possible, you either maintain ownership with the State for the good of the State, or you put in an independent umpire with a decent framework of rules and stand by them.

Taxing tale

MY regular readers will know that I regularly discuss matters regarding taxation – mainly the excessive nature of it.

Therefore, I was amused to hear of an email anecdote at the weekend that very much reflected the recent debate over tax cuts offered by the “family friendly” Costello budget.

I tracked the email down for you and you can read it, slightly amended, below. I am told University of Georgia professor of economics David R. Kamerschen is responsible for this, and forgive me if you’ve seen it previously … I haven’t.

It goes like this.

Suppose that every day, 10 people go out for dinner. The total bill comes to $100 and the group decide to pay their bill the way they pay their taxes, and it went like this:

The first four (the poorest) paid nothing. The fifth paid $1. The sixth $3. The seventh $7. The eighth $12. The ninth $18. The tenth (the richest) paid $59.

All 10 were quite happy with the arrangement, until one day, the owner said: “Since you are all such good customers, I’m going to reduce the cost of your daily meal by $20.” So now dinner for the 10 only cost $80.

The group still wanted to pay their bill the way they pay their taxes. The first four were unaffected. They would still eat for free.

But how should the other six, the paying customers, divvy up the $20 windfall so that everyone would get their “fair share”?

They realised that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth and sixth would each end up being paid to eat.

The restaurateur suggested reducing each person’s bill by roughly the same percentage, thus: The fifth, like the first four, now paid nothing. The sixth paid $2 instead of $3. The seventh paid $5 instead of $7. The eighth paid $9 instead of $12. The ninth paid $14 instead of $18. The tenth paid $49 instead of $59.

Each of the six was better off, and the first four continued to eat for free, but outside the restaurant, the men began to compare their savings.

“I only got a dollar out of the $20,” declared the sixth, pointing to the tenth member of the group “but he got $10!”

“That’s right,” exclaimed the fifth. “I only saved a dollar too. It’s unfair that he got ten times more than me!”

“That’s true!” shouted the seventh. “Why should he get $10 back when I got only $2? The wealthy get all the breaks!”

“Wait a minute,” yelled the first four in unison. “We didn’t get anything at all. The system exploits the poor!”

The first nine in the group then abuse the tenth for being greedy and selfish.

The next night the tenth diner didn’t show up. The nine sat down and ate without him, but when they came to pay the bill, they discovered that they didn’t have enough money between all of them for even half of it.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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